Bay Area commercial real estate boom on track for record year

A surging tech economy has sparked a Bay Area commercial real estate boom that is on track to make 2013 the best year on record.

New construction and renovation of commercial real estate -- including office, retail, industrial and hotel properties -- will exceed $6 billion this year across the nine-county Bay Area, according to this newspaper's analysis of figures supplied by McGraw Hill Construction, a widely respected source for data about the development and building sectors.

"High tech is spurring this -- you have the Facebook, Samsung and LinkedIn buildings that have gone up or are going up, and you have expansions by Google (GOOG) and Apple (AAPL)," said McGraw Hill economist Anne Thompson. "The economy is improving in the Bay Area. You have strong hiring in high tech that is spurring more demand for office space."

Through the first nine months of this year, the value of Bay Area commercial real estate construction totaled $4.9 billion. That already was more than the full-year totals for 2009, 2011 and 2012, and was approaching the $5.41 billion annual total for 2010.

Total commercial real estate spending in the Bay Area for 2013 is projected to be $6.3 billion to $6.7 billion. That would be the largest amount documented by McGraw Hill, whose records are based on building-permit data and go back to 1967. The current record was set in 2000, when Bay Area construction activity reached $6 billion.

The boom is not spread evenly across the region, however. Santa Clara, San Mateo and San Francisco counties all are seeing a surge in construction, while the East Bay counties of Alameda and Contra Costa are lagging far behind.

Jeff Hoopes, chief executive of Swinerton Builders, said the building boom does not appear to be a bubble. "This surge is a direct result of job creation."

Chad Leiker, a vice president with commercial real estate firm Kidder Mathews, said the development surge resulted from rising rents, which "are finally high enough to justify developers taking risks on construction or renovation of buildings."

The tech sector upswing has made Santa Clara County the Bay Area's top region for commercial real estate construction, McGraw Hill found. For the first nine months of this year, commercial real estate construction in the county totaled $1.86 billion, and it could reach $2.17 billion by the end of the year. That doesn't include the $1.3 billion Levi's Stadium project underway in Santa Clara because McGraw doesn't count open-air stadiums in its totals.

Among the tech companies that have contributed to the commercial real estate boom is Infoblox, a software company that struck a deal last year to expand to a new headquarters in Santa Clara. It would be able accommodate 500 employees, up from 250 in the middle of last year.

"We were bursting at the seams in tired old spaces in Santa Clara," said Shawna Belardi, global facilities manager for Infoblox.

This year, Infoblox moved into an office complex that had undergone an extensive renovation by developer Bixby Land, which added fire pits, sports courts, a gym, a cafe and other amenities to help the company attract and retain engineering talent.

The Infoblox renovation is part of a trend. In the South Bay, much of the construction involves face-lifts or replacements of existing buildings, said Phil Mahoney, executive vice president with commercial realty firm Cornish & Carey.

"The renovation and upgrade of existing buildings is unprecedented," he said. "I have never seen anything on this scale in 30 years of being in the business."

Builders also are succeeding with new projects. Santa Clara Gateway, a 916,000-square-foot complex near the Great America amusement park, found tenants quickly, said Andrew Goodman, regional vice president with Irvine, the project developer.

"Dell and Arista were the first deals, and then we got Global Foundries," he said.

Plenty more projects are in the pipeline.

Apple is expected to begin construction next year on its new campus in Cupertino, which published reports say could cost $5 billion. Google, while facing delays with its second campus at the NASA Ames Research Center, still intends to build the Mountain View complex.

Jim Beeger, a senior vice president with Colliers International, does not see the market cooling any time soon.

"At the beginning of this year, we had 20 tenants that were looking to lease space of 100,000 square feet or greater, and now the number is 31," he said.

Experts say further spurts of commercial construction could result from the desire by young tech workers to live in urban centers such as San Francisco and San Jose -- even if they work elsewhere in Silicon Valley. To accommodate those workers, developers are laying plans for housing, office and retail clusters on or near light rail, Caltrain or BART train routes.

After Santa Clara County, San Francisco County is poised to post the second-highest commercial construction activity in the Bay Area this year with a total of $1.95 billion. That would be well ahead of the totals for 2011 and 2012, but below the level of 2010, McGraw Hill reported.

San Mateo County is expected to see $765 million worth of commercial real estate construction this year, which would be six times the amount for 2012.

In contrast, the East Bay remains in a slump. The combined totals of commercial real estate construction in Alameda County and Contra Costa County are on track to reach $681 million, which is lower than all of previous four years.

"The East Bay is a real laggard in development right now," said Edward Del Beccaro, a managing director with Transwestern, a commercial realty firm. "The main construction activity in the East Bay is medical buildings and some retail. Otherwise, the East Bay is dormant."

The remaining Bay Area counties -- Marin, Sonoma, Napa and Solano -- are projected to produce a combined $187 million in commercial construction, which would be 2.8 percent of the projected Bay Area total this year.

Contact George Avalos at 408-859-5167. Follow him at Twitter.com/georgeavalos.